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For almost two decades, Chinese strategists have worried about what they regard as the geopolitical encirclement of China. At various times, they have attributed that encirclement to the United States, then India, and most recently Japan.[1] No doubt last week’s large-scale naval exercise in the western Pacific did little to dispel their concerns. For the first time warships from India, Japan, and the United States jointly conducted anti-air and anti-submarine drills in the Philippine Sea, an area directly adjacent to the Chinese-claimed waters of the East and South China Seas.

China’s Encirclement Concerns

Events over the past month likely added to China’s concerns. Last Friday, Indian Prime Minister Narendra Modi visited Bangkok in part to expand his country’s defense and maritime security cooperation with Thailand. A week earlier, he met with President Barack Obama at the White House, highlighting India’s closer ties with the United States. At a summit in late May, the United States and Japan, along with other Group of Seven countries, openly voiced their concern over China’s maritime actions. Days before the summit, Obama flew to Hanoi where he lifted the long-standing U.S. arms embargo against Vietnam, one of China’s South China Sea antagonists. Then after the summit, Japanese Prime Minister Shinzō Abe welcomed a Vietnamese delegation to discuss how they could enhance their military cooperation.

Certainly Chinese concerns over encirclement are not new. During the Cold War, China worried about the Soviet Union pursuing a similar geopolitical strategy. Even earlier, the Chinese Communist Party faced several all too real “encirclement campaigns” during China’s long civil war. Those experiences could have left an imprint may have left their imprint on China’s strategic thinking ever since.

What is clear is that Asia-Pacific countries have begun to prepare for what could be an era of heightened tensions. Such hedging has recently accelerated, as Chinese behavior in the East China Sea, South China Sea, and on its border with India has grown increasingly muscular. The United States has pursued its “pivot” or “rebalance” toward Asia, which shifted the bulk of American naval might to the Pacific. India and Japan have boosted their diplomatic and economic engagement in Southeast Asia and strengthened their military postures. Other countries have begun to do the same. As Australia’s 2016 defense white paper warned, “competing claims for territory and natural resources [in the region]… could undermine stability.”[2] But does such hedging constitute an encirclement of China?

Imagined Encirclements

In the early 2000s, China agonized over a possible American encirclement on its western border as U.S. forces streamed into Afghanistan and Central Asia. But a decade later, a persistent insurgency had worn down the United States and its allies. U.S. military bases in Kyrgyzstan and Uzbekistan were closed; America’s once-close relationship with Pakistan became acrimonious; and U.S. forces began their long withdrawal. China’s concern never materialized.

Now Beijing fears an even wider encirclement by the countries along the Asia-Pacific periphery, as they hedge against China’s assertive behavior. But most of them are still in the early stages of building up their strength. Although Australia has launched an ambitious military modernization program, its forces remain small. India’s defense bureaucracy continues to frustrate its military’s modernization and expansion plans. While Japan fields highly capable forces, its fragile economy constrains its military’s ability to grow. Even America’s “pivot” toward Asia may not be as weighty as it sounds, as the Obama administration has trimmed the overall size of the U.S. Navy. Hence, one could argue that China’s concern over an encirclement is, at least for the moment, not wholly warranted.

Undermine the Encirclement

Besides, the countries that China fears will encircle it are not yet a cohesive bunch. Officially non-aligned, India remains skittish about is relationship with the United States. And while Australia and Japan have security treaties with the United States, they do not have strong ties with each other. That was evident when Australia, at the last minute, chose to purchase France’s Scorpene-class submarine over Japan’s Sōryū-class submarine for its next-generation submarine fleet. India’s security relationships with Australia and Japan are equally tenuous. China could use bilateral deals to weaken those relationships and hinder a nascent encirclement from coalescing any further.

Breakout of the Encirclement

But even if China’s fear was to manifest itself, Beijing is already developing the means to break out of it. In late 2013, China turned heads across Asia with its “One Belt, One Road” initiative. Among the many infrastructure projects it has financed in Southeast Asia are a special economic zone in Cambodia, hydroelectric dams in Laos, and energy and railway projects in Malaysia. While China’s “yuan diplomacy” has not always been successful, it has had an impact. Cambodia and Laos have become reliable advocates for China within ASEAN. Malaysia largely remains on the sidelines of the South China Sea dispute, despite a rising number of Chinese infringements of its exclusive economic zone. China’s initiative may prove useful even in the Philippines, which has been a thorn in Beijing’s side. The Philippines’ new president, Rodridgo Duterte, has indicated that he would undertake the bilateral dialogue that China has long sought in exchange for Chinese economic development assistance.

Benefit of the Encirclement

Still, Beijing may have reason to play up its fears of encirclement. Despite its remarkable economic achievements, China faces a host of problems. Today, Chinese leaders must manage their country’s difficult transition from investment-led growth to expansion by private consumption, while dealing with its various debt-fueled bubbles. Even under the best conditions, those challenges are bound to be volatile. So some may see fears of encirclement as a way to rally public sentiment and maintain the “social stability” needed to ensure the longevity of communist rule. In any case, whether the “encirclement of China” is imagined or real, effective or not, one can expect the phrase to remain in Beijing’s lexicon for years to come.

During visits to Central and Southeast Asia in 2013, Chinese President Xi Jinping unveiled Beijing’s aspiration to create what it called the Silk Road Economic Belt and the 21st-Century Maritime Silk Road. Both would entail the construction of new infrastructure to better connect the present-day countries along what was once the ancient Silk Road between China and Europe. The former would do so over land with roads, railways, and airports; the latter across the ocean with seaports. China’s two-part aspiration is now commonly referred to as its “One Belt, One Road” initiative.

At the time of Xi’s unveiling, China was near the zenith of its economic power. Not even the 2008 global financial crisis seemed able to derail China’s economic ascent. Some saw the “One Belt, One Road” initiative as a way for China to extend not only its economic, but also its political reach across Eurasia. India had begun to worry about what it considered to be China’s “string of pearls,” a series of Chinese-built seaports across the Indian Ocean. Others viewed the initiative even more broadly as an ambitious effort to reorient global commerce towards China.

But since then the air of invincibility surrounding China’s economy has dissipated. China’s engines of growth—export manufacturing and infrastructure construction—have sputtered, as the debt that fueled them and the overcapacity that they created have ballooned. Over the last year and half, Chinese leaders have been forced to repeatedly “fine tune” their economy to keep it growing. They boosted China’s government spending, devalued its currency, cut its interest rates six times, lowered its bank reserve ratio seven times, and even directly intervened in its stock market. Still, China’s economy continues to slow.

That slowdown has spurred Chinese leaders to seriously begin to shift their export and infrastructure-led economy to one that is driven by consumers. How successful that transition will be is uncertain. But one thing is clear, the “social stability” so prized by the Chinese Communist Party has begun to fray. Popular unrest is on the rise. The number of labor protests in China has soared from about 100 in 2010 to almost 2,500 in 2015.[1]

Thus, Beijing has every incentive to keep its giant manufacturing and infrastructure-construction state-owned enterprises (SOE) humming, as its economy makes the transition. Seen in that light, China’s “One Belt, One Road” initiative looks less like a well-planned strategy and more like a scramble to keep the order books of its SOEs full. New infrastructure contracts abroad would help do that; and once built that new infrastructure might help Chinese manufacturers export at a lower cost.

One can see China’s push to build more infrastructure projects from Indonesia to Pakistan. In September, a Chinese-led consortium won approval from Indonesia to build a $5.5-billion high-speed railway in Jakarta. But the consortium won only after it agreed that the Indonesian government would not have to guarantee the Chinese loans needed to finance the railway’s construction. While that concession may have secured the approval, it also increased the potential financial losses that the consortium would have to bear if anything goes wrong. With such large and complex construction projects, it is hard to ensure that will not happen.

Surely, China expected a different outcome after its construction companies built a port at Gwadar for Pakistan in 2007. Despite a total investment of over $1 billion, the port has remained virtually idle. Now China is doubling down on the Gwadar project. It has promised $45.7 billion in fresh financing to build the China-Pakistan Economic Corridor, a series of energy, road, railway, and pipeline projects that will more closely tie Gwadar to China.

Of course, China can still benefit from such infrastructure projects even if they turn out to be unprofitable. The new road, rail, and pipeline routes through Pakistan will enable China to import strategic resources, like oil, natural gas, and minerals, from the Middle East without being reliant on sea routes through the Indian Ocean. The projects could also deepen China’s “all-weather” friendship with Pakistan by creating new constituencies within Pakistan that benefit from the economic activity that the trade routes to China could foster.

Other land-based links to China could do the same. The Kunming-to-Bangkok railway is another example. The portion of it in China is already finished; the portion in Laos broke ground in December; and the final portion in Thailand is slated to begin construction in May 2016. Given the massive scale of Chinese trade, even if a small portion of it is redirected over the railway, it could reshape the economic interests of a small country like Laos. Indeed, China may hope to use the railway to pry Laos away from its traditional ally, Vietnam, and gain another friend in ASEAN. On the other hand, China would not benefit to the same degree from Chinese-built seaports and airports that are not directly connected to it. While they may boost trade in the host country, the course of that trade could be redirected elsewhere, if trade with China does not evolve as expected.

That is now a real possibility. If the Chinese economy continues to soften, it means that China will need to import fewer raw materials and export fewer finished goods. In the second half of 2015 China’s monthly imports fell 10 to 20 percent from a year earlier; and its exports slipped too. Unless global demand revives or Chinese consumers pick up the slack, Beijing might well expect its “One Belt, One Road” initiative to yield more long-lasting political than economic benefits.

Despite elections last Sunday, Thailand remains riven by political conflict. On the one side is the current government of Prime Minister Yingluck Shinawatra (and nominally her brother, Thaksin Shinawatra, who was ousted from power in 2006). Their supporters dominate Thailand’s north and northeast. On the other side is the Democrat Party, whose adherents are largely drawn from Bangkok’s middle class, southern Thailand, and the royalist establishment. While many issues divide the two sides, the outcome of their struggle may have an impact on China’s reach in Southeast Asia.

Countries have long dreamed of a railway connecting China and Southeast Asia. A century ago, both the British and French governments hoped to link their Southeast Asian colonies with China. But ultimately terrain and war halted those ambitions. The Cold War poured further cold water on the idea, as revolutionary China seemed more intent on exporting communism than trade.

But a decade after China implemented its market reforms, things began to change. By the mid-1990s, the ASEAN-Mekong Basin Development Cooperation revived hopes for a railway between China and Singapore. But a lack of funding prevented its progress. Finally in 2011, the Asian Development Bank, working with the region’s countries, agreed to finance a circuitous railway that ran from China, down the length of Vietnam, across Cambodia, through Thailand, and finally down to Malaysia and Singapore. Railway construction costs were held down by the fact that the route knitted together several existing railway lines, though a substantial sum would be needed to upgrade existing rails and rolling stock.

But China has since upended the plan. It sought a more direct route to Southeast Asia. It had already built a railway from Kunming (in southern China) to its border with Laos. Then China’s railway minister pushed for $5 billion worth of Chinese financing to extend that railway to Vientiane, the Lao capital. The early 2013 downfall of that minister on corruption charges (and the elimination of his railway ministry) left some to wonder whether the proposed railway would proceed. But that uncertainty was lifted a few months later when Chinese President Xi Jinping proposed the creation of a China-backed Asian infrastructure development bank, part of his new charm offensive in Southeast Asia. One of the infrastructure projects that he highlighted was the proposed railway. However, even if its financing looks more settled, the railway still faces the challenge of construction. While its route is more direct, it will require scores of bridges and tunnels to wend its way through Laos’ mountains. Meanwhile, at the other end of the hoped-for railway, China has expressed interest in the expected tender for the Malaysia-Singapore segment later of it in 2014.

Such a railway would have strategic value for China. Just as the transcontinental railways across the United States helped bind its eastern and western halves in the late 1800s, China’s north-south railway would help better integrate Southeast Asia—a mainly seaward-facing (and American-leaning) region—with its economy and political interests. In addition to being more direct, the route that China’s railway has chosen would tighten the connection between it and its ally Laos and entirely avoid Vietnam, a country with which China shares a long and quarrelsome history.

Whether the north-south railway from Kunming to Singapore is completed depends on Thailand, which sits in the middle of its projected path. Thailand’s current government has already discussed with China the possibility of building a connecting line between Vientiane and Bangkok, using concessionary Chinese loans. (Rather than replace the existing railway, a new high-speed one would be built next to it.) That connecting line would bring construction jobs to Thailand’s economically-lagging northeast. But there are those in the region who are concerned about the schemes of China and Laos, due to their unfettered hydroelectric dam development on the Mekong River and its tributaries (those dams could cause droughts or floods on their agricultural lands if they are poorly managed). Should the Democrats succeed in displacing the current government from power, one might expect that talks with China over the railway would continue, given that many of their Bangkok supporters also favored hydroelectric dam construction on the Mekong River. However, in the tit-for-tat nature of Thailand’s politics, grudges can be deeply held and if the proposed railway between Vientiane and Bangkok is too closely associated with the current government, the railway could become a casualty of the domestic politics between the two factions.

Just how concerned should observers be about a railway that ties Southeast Asia more closely to China? In the short run, they probably need not worry too much. After all, China financed and built a port and pipeline in Myanmar that linked its coast to China’s border, but Myanmar still sought to build stronger relationships with Japan and the United States. But over the long run, as economic interests in the infrastructure become entrenched and if they come to influence a country’s government, then national interests can shift. Thus, it would be wise for Japan and the United States to encourage the speedier construction of the Asian Development Bank’s railway route through Vietnam. That route would not only encourage stronger Cambodian bonds with Thailand and Vietnam, but also enable Cambodia to become less reliant on Chinese foreign direct investment for its economic growth.

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